The rise of e-money in low-income and emerging economies has transformed financial inclusion and monetary policy transmission. Case studies from sub-Saharan Africa show that e-money and banking sectors complement each other, strengthening monetary policy effectiveness. This column uses data from 47 countries over 20 years to show that e-money leads to stronger policy passthrough, increased bank deposits and lending, and enhanced competition. The findings suggest that policymakers should ensure e-money remains accessible without bank accounts, encourage collaboration between e-money issuers and banks, and leverage e-money to improve financial stability and inclusion.
M-pesa in Kenya, GCash in the Philippines, and Orange Money in Cote d’Ivoire – these institutions began providing mobile phone-based money transfer services between 2004 and 2008, long before successful mobile payment systems took off in richer parts of the world.
In many low-income and emerging market economies around the world, e-money – digital currency denominated in legal tender and exchanged through feature of smart phones – has gained widespread adoption. 1 When it comes to economic development and financial inclusion, the development of digital currencies is indeed one of the most significant offsprings of technological innovations in the financial sector.
This success in the development of e-money, because it changes the financial sector landscape, creates challenges for policymakers. Are there any new risks coming from the emergence of new players and new payment systems? Should these new players be regulated and if so, how? Progress has been made in this area – for example, nonbank e-money issuers such as mobile network operators are now subject to not only consumer protection regulation and payments oversight, but also prudential regulation and supervision as they grow in size (Dobler et al. 2021).
This surge of e-money has also led central banks to explore the possibility of issuing central bank digital currency. A large volume of research has followed, providing a conceptual framework for the potential implications, for example, on financial stability and bank intermediations (Panetta et al. 2022, Chiu et al. 2023, Burlon et al. 2024).
There is another, less-studied question, which matters a great deal for policymakers: what does the development of e-money mean for monetary policy transmission?
There is no obvious response to this question. In fact, the widespread use of e-money can have important, yet theoretically ambiguous consequences. This is because the way non-bank e-money issuers interact with banks can take two forms. E-money issuers can substitute for the role of banks, leading to financial disintermediation. They can also complement banks, by enlarging the pool of depositors and borrowers, leading to higher financial intermediation and thus stronger transmission of monetary policy. The answer to the question of whether development of e-money or other forms of digital currencies enhances or weakens monetary policy transmission is therefore a matter of empirical assessment.
In Huang et al. (2024), we present case studies of five countries at the frontline of e-money development in sub-Saharan Africa: Ghana, Kenya, Nigeria, Tanzania, and Uganda. E-money regulations of these countries share similar features: (1) money collected by e-money issuers must be maintained in banks; (2) e-money issuers can extend credit as long as they are in partnership with banks; and (3) most e-money issuers can offer interest on e-money balances. These features give e-money the potential to enhance financial inclusion and bolster banking sector financial intermediation – ultimately strengthening monetary policy transmission. In addition, to the extent that e-money issuers compete with banks over household savings, there is more competition in the banking sector, potentially further strengthening monetary policy transmission.
We investigate this question further using panel data on 47 countries over 20 years. The development of e-money is measured by e-money intensity, which is defined as the ratio of the number of registered e-money accounts to the number of bank accounts. The strength of monetary policy transmission is assessed from three perspectives: (1) the responsiveness of the bank lending and deposit rates to changes in the monetary policy rate; (2) the spread between the lending and deposit rates; and (3) the size of bank deposits and credits. We use a two-way fixed effect estimator to estimate the relationship of the development of e-money and monetary policy transmission.
Figure 1 Relationship between changes in the lending rate and the policy rate (percentage points)
a) Pre-e-money era
b) Post-e-money era
Source: Authors’ calculations.
Note: This figure shows the relationship between changes in the policy rate and changes in the lending rate for low and high financial inclusion (FI) countries in pre- and post-e-money eras. Changes in the policy rate are measured as changes in the policy rate from month t-1 to t, while those in the lending rate are measured as changes in the lending rate from month t-1 to t+6 to allow for lagged effects. Data cover months from December 2001 through December 2019, while periods with no policy rate changes are excluded.
We find that the development of e-money is followed by stronger monetary policy transmission, in the form of a higher passthrough of monetary policy rate to bank lending rate, growth in bank deposits and credit, and lower bank lending-deposit spreads. More specifically, our main findings are as follows:
- The development of e-money is associated with stronger monetary policy transmission. The elasticity of bank lending rate with respect to monetary policy rates is higher in the post-e-money period (Figure 1); evidence is particularly pronounced in countries where e-money takes off and ex-ante financial inclusion is relatively limited.
- E-money and the banking sector seem to develop in tandem, suggesting that complementarity is at play. The development of e-money is followed by growth of bank deposits and lending. Again, the relationship is more pronounced in countries where e-money takes off and ex-ante financial inclusion is relatively limited.
- Lastly, there is evidence of more competition in the banking sector with the development of e-money. Bank lending-deposit rate spread declines with the development of e-money. This result is consistent with the idea that the development of e-money enhances competition in the banking sector and improves efficiency in financial intermediation.
These findings offer insights for policymakers looking at the design and regulation of e-money or other forms of digital currencies. First, e-money should be accessible without the need for a bank account. This is crucial to allow e-money to improve access (financial inclusion). Second, e-money regulation should encourage a complementarity between e-money and banking sector growth. For instance, e-money balances should be channelled and allowed to be used by banks for liquidity management purposes. Third, e-money issuers should be encouraged to collaborate with banks to extend credit to the private sector (financial deepening). E-money issuers could also share data and work with banks to enhance credit registries to facilitate more efficient lending. This can foster a mutually beneficial relationship between the two industries, promote broader financial access and deepening, while safeguarding financial sector stability.
Source : VOXeu
